Death of (long) distance

Competition killed the fat

While they may have been relevant a couple of decades ago, charging telephone calls based on geographical distance is an outdated concept. On modern networks, the cost of carrying a call is largely independent of the distance. But telecom operators have little incentive to change the pricing model for a couple of reasons: first, a distance-based tariff allows them to charge some subscribers more (which they believe will improve their revenues); and second; they can use the proceeds of this lucrative service to cross-subsidise other non-lucrative services — rural telephony, for example.

If distance is not a major determinant of the cost of service, how are services priced? In many markets where there is greater competition, prices are set by the rules of supply and demand. For example, an Indian caller will find it cheaper to call the United States half-way across the globe, than to call nearby Thailand. Mobile phone users in India are already familiar with near-flat rate charging for domestic long distance calls. Several operators in the United States offer cheap, flat-rate long-distance calling. In every one of these cases, market forces have emerged as the killers of distance.

In this context, the Indian government’s (cryptic) announcement that it will bring about the death of distance in the country stands out in sharp contrast. It is unclear whether Dayanidhi Maran, India’s telecom minister, spoke on behalf of the state-owned BSNL, the incumbent domestic carrier that he controls, or on behalf of TRAI, the industry regulator, which he also controls. In case of the former, this is good news for the economy in general and the industry in particular, because higher traffic volumes will mean higher revenues, although coming at the lower profit margins. But in case Maran spoke on behalf of the regulator, the move is retrogressive. Where there is competition, and in the case of national long-distance services there is, TRAI should allow market forces to determine prices. Its interference will not only be ugly and unwelcome but almost certainly be detrimental to the industry as a whole. The private operators who invested in building national long-distance networks must be allowed to charge their customers as they see fit.

The worst case, however, is not as much as the government concerning itself with tariff setting as it is with confusing its roles. It is simultaneously responsible for India’s social and economic growth, BSNL’s revenues (as its principal shareholder) and the industry’s revenues (as a neutral umpire). The consequences of mixing one’s drinks can well be a quick knock out.

Tailpiece:The Financial Expresscalls a decision by the government to fix prices a ‘victory for market economics’.